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US trio wins Nobel Prize 2021 in economics for work on real-world experiments

Three US-based academics have won the Nobel Economics Prize 2021 for research on the labour market using “natural experiments”, or observational studies, that have revolutionised empirical research in the field, the jury said.

Canadian-American David Card, Israeli-American Joshua Angrist and Dutch-American Guido Imbens bagged the prestigious award for providing “new insights about the labour market” and showing “what conclusions about cause and effect can be drawn from natural experiments,” the Nobel committee said in a statement.

The three experts will split the 10 million Swedish kronor (roughly $1.1 million) for this year’s prize. One half of total prize money will be distributed in equal parts between Joshua Angrist and Guido Imbens while the other half will go to David Card.

Using natural experiments, David Card has analysed the labour market effects of minimum wages, immigration and education. His studies from the early 1990s challenged conventional wisdom, leading to new analyses and additional insights. The results showed, among other things, that increasing the minimum wage does not necessarily lead to fewer jobs. We now know that the incomes of people who were born in a country can benefit from new immigration, while people who immigrated at an earlier time risk being negatively affected. We have also realised that resources in schools are far more important for students’ future labour market success than was previously thought.

Data from a natural experiment are difficult to interpret, however. For example, extending compulsory education by a year for one group of students (but not another) will not affect everyone in that group in the same way. Some students would have kept studying anyway and, for them, the value of education is often not representative of the entire group. So, is it even possible to draw any conclusions about the effect of an extra year in school? In the mid-1990s, Joshua Angrist and Guido Imbens solved this methodological problem, demonstrating how precise conclusions about cause and effect can be drawn from natural experiments.

“Card’s studies of core questions for society and Angrist and Imbens’ methodological contributions have shown that natural experiments are a rich source of knowledge. Their research has substantially improved our ability to answer key causal questions, which has been of great benefit to society,” says Peter Fredriksson, chair of the Economic Sciences Prize Committee.

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